This seminar aims to provide entrepreneurs and company founders with an overview of the common stumbling blocks encountered in raising EIS / SEIS fundings so that they can maximise funding opportunities and help ensure that their investors’ tax position remains protected.

You will ideally already have an understanding of the basics of EIS / SEIS, although not essential.

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Tax planning is getting a real battering at the moment – in some cases, for all the right reasons – but there are many instances where effective tax planning is essential for fast growth businesses and, in fact, positively encouraged by the government.

Aside from printing money to erode away much of our UK budget deficit (…), the Government appreciates that by encouraging entrepreneurs to build hi-tech companies here in the UK then we might have a fighting chance of seeing a brighter economic picture in the short-medium term.

To help us achieve this, the Government introduced 5 key statutory tax incentives that they absolutely and positively want entrepreneurs to claim:

As a chartered accountant specialising in advising fast growth companies in these areas – you can find plenty more about these tax incentives on this site or by getting in touch – in my view:

If all UK entrepreneurial businesses took advantage of these five statutory tax incentives (where applicable) and used the funds saved to reinvest in new jobs, new marketing channels and new business ventures; then surely we could reinvigorate our economy with fresh, innovative ip rich companies that can compete on a global scale

Enough of the ‘tax bashing’ – let’s make sure that our entrepreneurs have all of the tools necessary at their disposal if they are to get us back on top – an effective and supportive tax regime for entrepreneurs is one of them (and the good news in the UK is that – for now – we have one…).

As an ambitious entrepreneur and founder of a fast growth business you may benefit from reviewing the following generous tax breaks as part of your 2013 planning:

1. Patent box – introduced with effect from 1 April 2013, companies will be able to elect into this new beneficial company tax rate and pay tax at just 10%. This new rate of corporation tax will be phased in over a four year period.

Innovative UK companies should be taking steps now to ensure that their patents qualify and apply across the widest possible range of products and services to maximise tax savings.

2. R&D tax relief – the SME R&D tax relief continues to get better and better with the enhanced corporation tax deduction now at 225% with no de minimus spend nor PAYE cap on repayments.

3. Entrepreneur’s relief – when you come to sell the shares in your company you could benefit from this preferred rate of capital gains tax of just 10% on the first £10m of lifetime gains. You must be an officer or employee of the trading company and hold at least 5% of the ordinary shares and voting rights for the 12 months leading up to disposal of the shares to qualify.

You must ensure that the qualifying conditions are not (inadvertently) breached especially if a sale is on the cards in the foreseeable future.

4. EMI share options – the Enterprise Management Incentive share option scheme (EMI) has long been an attractive tool for retaining and incentivising key employees, however, it’s about to get even better….

It has been a long running source of frustration that the option holders struggled to satisfy the requirements of entrepreneur’s relief (ie they rarely tick the 5% share holding requirement nor the 12 month minimum holding period), however, changes are afoot to allow option holders to accrue their 12 month qualifying holding period from the date of grant and for sub 5% holdings to qualify. This promises to be a great development.

5. Seed Enterprise Investment Scheme (SEIS) – raising funding for early stage (< 2 years) trading companies is made a whole lot easier when the investors can receive a 50% income tax break on the funds invested (potentially up to 78% tax relief up until 5 April 2013)!

Companies are limited to £150,000 in total under SEIS whereas individuals have a £100,000 annual investment allowance.

These are just a handful of potentially lucrative tax breaks that should be high on your agenda if you are to release much needed cash into your business and get off to a cracking start in 2013!

The Seed Enterprise Investment Scheme (SEIS) provides an excellent opportunity for early stage fast growth companies to access funding from founders, family, friends and business angels.

In essence it rewards investors by allowing them to reclaim income tax at a rate of 50% of their investment under the scheme (limited to £100,000 investment per tax year) plus a potential capital gains tax free disposal after three years.

But such a generous tax break comes with (many!) terms and conditions….

Common areas where there seems to be much head-scratching is around the limit for the SEIS investment into the company of £150,000 in total; the limit of £200,000 or less gross assets and the 30% connection test. Note these are just a few of the conditions!

Given the above, how can founders make the most of this SEIS tax break whilst getting the funding they need?

Try to spread the £150,000 total investment between investors / founders to avoid breaching the 30% connection test e.g four individuals with 25% each can work well

Remember the test for the £200,000 gross assets is applied immediately before the issue of the SEIS shares – so you could seek external (non-SEIS) investment top-up funding afterwards. Note that EIS funding is only available once 70% of the SEIS funding has been spent.

Investor(s) could invest an amount as a subscription for SEIS shares up to 30% of the share capital and then loan the remainder.

Investor(s) could invest further amounts in a company by subscribing for less shares but with the remainder being credited to share premium e.g. if an investor / director already holds 29% of the ordinary share capital they could invest a further sum (subject to the SEIS limits) for a further 1% of the ordinary share capital with the remainder posted to share premium.

These are just a handful of examples based on recent experience of advising fast growth companies and investors – as always there are many ways to skin a cat but it is important to review all options to make the most of the UK SEIS and EIS tax reliefs.

The £52m is spread over 985 claims giving an average claim of £53,000 (interestingly, this compares with an average claim of just £19,000 in London!), although this includes large company claims which can be significant. However, even when claims by large companies are split out North West SME companies claimed an average of £32,000 in tax relief.

This is good news for local North West companies and the number of claims made was 3rd highest overall after the South East (1) and London (2).

Overall, out of the almost 5 million SMEs in the UK only 8,140 R&D tax claims were made in 2010-11 and less than 1% of UK SMEs have made a claim for enhanced R&D tax relief since its introduction in 2000. I find this statistic staggering.

If you have made R&D claims, compare your claims with the averages noted above and if your claim was for less than £32,000 consider whether it is worth getting a second opinion – you can amend claims if they are still within the two year timelimit.

A common question asked by business founders and entrepreneurs is how much of the profit generated (after paying all expenses) they should leave in the company – or put another way:

“How much should I pay myself?”

Here are two scenarios:

William pays himself enough to live off, pay the bills and take the family away for a well earned holiday abroad each year. The remainder he leaves in the company to strengthen its balance sheet and reinvest in new products, services and people as the opportunities arise (as well as protecting against a sudden unexpected ‘black swan‘ downturn in the market). William is mindful of the risk that carrying too much cash could interfere with the trading status of his company in the eyes of the tax authorities and this is kept under review by his trusted Wing-Man (his accountant).

Meanwhile, Harry strips the majority of the cash out of his business each year leaving some to protect against downturns. He works with his accountant Wing-Man to manage the tax efficient extraction of the profits to avoid any unnecessary tax leakage.

Which strategy is right?

It depends on the goals and aspirations of the founders plus the opportunity cost of either extracting or leaving the cash in the company.

As an entrepreneur you are both a wealth creator and an expert capital allocator. So you must have a plan as to the optimum way you can deploy and allocate the wealth you create for maximum future returns.

If you adopted William’s strategy and stripped most of the profits out you had better have a good plan as to how you are going to deploy that cash to get the best return on your capital. For example, are you going to invest in new ventures, back some promising entrepreneurs as a business angel (SEIS might be of interest?) or perhaps invest in property?

Leaving the cash on deposit in your current account is not a good strategy.

On the other hand, if right now you see plenty of opportunities to get a good return on your capital in the business then leave it in there and take some small bets on new products, services or other initiatives and build from there.

Back to the question and answer: it depends.

There is no definitive answer as it depends on a number of factors including:

your goals

where your business is up to in its lifecycle

what opportunities exist inside your business

what opportunities exist outside your business

Always good to discuss your personal strategy with a trusty Wing-Man….

If you are looking at starting a new hi-tech venture then the timing has never been better in utilising the latest available UK tax incentives.

Consider a scenario where say 4 enterprising entrepreneurs are looking at building a new state of the art technology platform.

They budget it will cost c£1m to get to market but know they can prove the concept with c£100k-£150k.

But there’s a problem – cashflow is tight….

This is where a bit of forward tax planning can help.

Firstly, they could set up a new company to undertake the venture. They could then structure the shareholdings such that no shareholder and director has more than 30% of the shares and subscribe for shares under the Seed EIS Scheme (SEIS). The company would need to obtain certification that it is SEIS qualifying and it would be well advised to seek advance assurance from HMRC.

A company can raise £150,000 in total under SEIS so each of the four shareholders could subscribe £37,500 for 25% of the ordinary shares.

Under SEIS, each shareholder would be able to reclaim 50% income tax relief on their investment – so £18,750 income tax relief could be claimed by each shareholder amounting to a total £75,000 tax saving.

But there’s more….

The company could use the funds to engage in a qualifying SEIS trade of preparation for a trade by carrying out R&D activities. The R&D work could fall within the R&D tax credit regime which allows for a 125% uplift in qualifying spend for SMEs and capacity to claim a tax refund in situations where the company is loss-making – this will almost certainly be the case based on our facts as the company is pre-revenue.

So say the company invests the £150,000 into qualifying R&D in its first year then the company would be eligible to deduct a further £187,500 for tax purposes i.e. 125% * £150,000.

The company would suffer a tax loss of £337,500 and could either carry this loss forward to offset against future taxable profits or it could elect to surrender the tax loss in return for a tax refund. The refund is restricted to 11% of the enhanced R&D tax spend which equates to £37,125 cash back from HMRC.

Once the SEIS cash has been exhausted they can seek further funding under the less favourable (but still hugely attractive) Enterprise Investment Scheme (EIS). Further R&D tax credits should be available in later years too whilst the R&D activities continue.

So our new venture has succeeded in deploying £150,000 of funding and expenditure at a net cost to the founders of just £37,875. SEIS and R&D tax incentives have effectively provided the additional £112,125 cash funding!

This scenario does not take into account the possibility of some or all of the SEIS shareholders taking advantage of the one-off capital gains exemption on gains reinvested in the tax year to 5 April 2013 – we’ll leave this for another post as the tax savings are staggering!

Hopefully this illustrates that with just a bit of forward planning and by seeking some professional advice, it is amazing how you can conjure up much needed additional cash to fund worthwhile ventures.

The introduction of Seed EIS (SEIS) is a major break-through for early stage companies seeking funding.

Here are 10 need to know (N2K!) facts for start-up founders on the new SEIS scheme:

SEIS allows investors in early stage companies to receive 50% income tax relief on investments up to £100,000 per year. So for every £1 invested, HM Revenue & Customs will refund 50p regardless of their rate of income tax!

SEIS investors will pay no capital gains tax on ultimate disposal of their shares so long as the company remains as a qualifying SEIS company for 3 years. So even if your business turns into tomorrow’s Facebook, the investors will not pay a penny in capital gains tax on ultimate exit!

There is an added bonus for investors between 6 April 2012 – 5 April 2013 in that they can reinvest any gains crystallised in the year and wipe out the gain completely – so say an individual sold a rental property in the year and realised a profit / gain of £100,000 they would normally be liable to pay up to £28,000 capital gains tax. However, they could reinvest this into a SEIS investment instead and receive 50% income tax relief plus eliminate the taxable gain entirely – this equates to a whopping 78% tax relief or, put another way, a 22p in the £1 investment cost…..!

Your company must have commenced trading within the past two years to qualify for Seed EIS – remember this is aimed at early stage companies only – and must be unquoted (AIM and PLUS listings count as unquoted for these purposes)

Companies are limited to raising a maximum of £150,000 under SEIS – after this, they may be eligible for SEIS’s Big Brother, EIS, provided 70% of the SEIS cash has been spent (…!)

To qualify for SEIS, companies must have less than 25 employees and gross assets of £200,000 or less (before the investment round).

Early indications were that SEIS would apply to loans to startups as well as subscription for shares but the rules as implemented restrict the relief to subscription for ordinary shares only.

There are material interest limits (30%), certain trades are excluded and there are a fair few stumbling blocks for the unwary as the rules largely mirror EIS.

You can obtain advance assurance on whether the company is a qualifying SEIS company from HMRC.

It applies from 6 April 2012. The legislation states that it will run for 5 years so to 5 April 2017 but hopefully it will be extended.

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So you’ve had a good look at the activities of your company and think you might have a qualifying claim for Research and Development (R&D) Tax Credits – but what next?

HMRC R&D tax credits can be successfully claimed by UK companies across all industry sectors – from builders to engineers to manufacturers to technology firms to, of course, R&D companies.

There are 4 key steps to making a successful claim for HMRC R&D tax credits:

1. Prepare a short report that outlines the nature of the qualifying R&D activities for UK tax purposes

Firstly, breakdown the project(s) work carried out in your company over the past two years into potential qualifying and non-qualifying projects.

Consider which projects you feel pushed the boundaries of knowledge in your field. For example, you may have found yourself at point A and wanted to get to point B in terms of product or service delivery but had no idea how to get there? You therefore incurred time and costs on competent professionals in your sector seeking to find potential solutions. You may have hit roadblocks along the way?

If so, these can all be pointers towards potentially qualifying R&D activities for tax…

You should aim to build your supporting R&D report around 4 key headings:

What is the science or technological advance sought?

What were the scientific or technological uncertainties involved in the project?

How and when were the uncertainties actually overcome?

Why was the knowledge being sought not readily deducible by a competent professional in your field?

HMRC deals with R&D tax credit claims via its specialist R&D Units – I have to say the team that work at these offices are amongst the most helpful and pragmatic of all the HMRC departments (praise indeed!). Your report will be sent to your closest R&D Unit.

2. Quantify your R&D tax qualifying costs

Qualifying costs for R&D tax purposes fall within 3 main categories:

Emoluments paid to staff engaged in the qualifying R&D (this covers salary, employer’s NIC and employer’s pension costs). Make a table (say in excel) of all the staff engaged in R&D and their total emoluments for the year. Then apply a percentage based on the number of days they were directly engaged in the R&D v their total working days. Ideally your team keep timesheets but if not, an estimate based on diaries etc will suffice. Total these costs up and this will likely form the bulk of your claim.

Subcontractors / Externally provided workers – These are third parties that you subcontracted elements of the R&D work to or workers provided by staff provider companies e.g. agencies, in the latter case. These relationships can sometimes be quite tricky to classify for HMRC R&D tax credits purposes and the paperwork will often be key.

Software / Consumables can also be included in a claim. These will typically be bits of off-the-shelf software that you had to buy to use within the R&D process (e.g. licences) or bits of consumable kit or parts if you are developing physical products or prototypes. Really anything that is used up as part of the process or discarded. Any capital expenditure e.g. on PCs bought for the process, are not likely to be consumables for these purposes; rather these would attract 100% tax write off under the R&D scheme. Power and water costs can also be claimed. Ideally you would have a section of the building that you dedicate to the R&D activities so that you can section off the floorspace to calculate a proportion of the total power and water costs. Otherwise you would need to consider some other means of pro-rata allocation, perhaps based on the number of qualifying employees.

The total of the above costs will form the basis for your claim.

3. Apply the R&D tax uplift or enhancement to the total of the costs to calculate your R&D claim.

The enhancements set out below apply for UK SMEs which will cover the majority of readers of this site as the thresholds for R&D are huge (less than 500 employees and either turnover of less than €100m or a balance sheet total of less than €86m).

From 1 April 2011, the enhancement is 200% (it was 175% in the year up to 1 April 2011).

From 1 April 2012, the enhancement is 225%!

[Update: From 1 April 2015, the enhancement is 230%!!!]

So say your total qualifying costs (from points 1-3 above) in your financial accounting period ended 31 March 2012 are £234,235, then under this R&D tax incentive you will receive an additional £234,235 deduction against your taxable profits for the year (for company corporation tax purposes only).

Taking this a step further, say your profits adjusted before tax (but pre R&D uplift) are £125,000, then this additional R&D adjustment will turn an otherwise likely corporation tax bill of £25,000 into a tax loss of £109,235. Not only does this eliminate the £25k tax bill but it potentially results in a tax refund from HMRC of £13,654! (any refund is capped by the PAYE paid by the company, although this rule falls away from 1 April 2012)

Now you can hopefully see the value of investing some time to pull together an R&D tax credit claim!

If your financial accounting period straddles the 1 April change of rates (say a 31 December year end) then you need to apportion expenditure pre and post this date.

You can go back to accounting periods ended in the past two years to make or amend claims so its not too late to revisit and amend previously filed corporation tax returns.

4. How to file the R&D tax credits claim with HMRC

The R&D tax credit claim is included in your corporation tax return for the relevant accounting period. Corporation tax returns are filed online. Your report is sent to the relevant R&D Unit after filing the return online.

There is some work to be done before the claim is filed to determine the optimum treatment of the R&D claim for your specific circumstances. For example, rather than reclaim the cash tax credit, it may work better for you to carry a resulting loss back to the previous profitable accounting period or carry forward to future periods if you expect to return to profitability quickly.

This is especially important because the R&D tax credit repayment option gives you a discounted return than if you held out and offset the enhanced deduction against future or past profits at your full corporation tax rate. Even though the enhanced deduction increases to 125% from 1 April 2012, the repayment position does not improve. Watch out for this!

The seminar is pitched at companies from startups through to more established companies as we walk them through the sorts of tax issues and opportunities they should consider as they seek to grow profitable companies.